Question

Suppose the CPI is 100 this year and is expected to be 110 next year. I am making a loan to you and I want to earn a 6% annual real rate of interest.What annual nominal interest rate should I charge you?

Answer 1

nominal interest rate = 16%

Step-by-step explanation:

real interest rate = nominal interest rate - inflation rate

6% = nominal interest rate - 10%

nominal interest rate = 16%

The consumer price index (CPI) is used to measure the inflation rate. If this year's CPI = 100, and next year's CPI = 110, then the inflation rate = (110 - 100) / 100 = 10%